Monday, 15 September 2008

Learnings from a day of chaos

At least I am not clearing my desk like those at Lehman Brothers, however it has been a truly terrible day for the US and UK financial sectors.

To lose 2 major investment banks in a day in the US is more than careless. It also shows the futility of the nationalisation of Bear Stearns, so much US taxpayer money down the drain. By implication the same is true of Northern Rock.

I don't know what the US will do about the request for help from AIG, but it seems sensible to ask them to go away and sell themselves. We will find out tomorrow.

In response markets have fallen, the sky is falling in being the cry. Yet oil fell in price today and gold did not shoot up. Commodity falls are a good thing, they lower future inflation and will allow the Bank of England to cut rates over the next few months as inflationary pressures ease.

But the worry for the UK is our banks, HBOS is heavily exposed given its funding model and mortgage profile. Not surprising, its shares fell heavily today. RBS and Barclays are in the mix too and even HSBC.

Coudl it happen here? Yes.

UPDATE: Looking at things overall, will be interesting if a hedge fund goes down because it was stuck with all the stock it was trying to short...must have hurt George Soros quite a bit.


Old BE said...

Am I being thick? Surely there is a price at which even very exposed banks become good value for a takeover?

Might we end up with a small number of very large banks which can then repair their balance sheets? Sort out the competition aspects once the turmoil is over?

Richard Elliot said...

An exciting 48hrs (sadly I was in Sunday) for banking. Some people in the Tokyo and New York offices haven't been home yet.

The first Lehman's CV arrived on my deak at 10:14 this morning, a lot a more followed. On a personal level I feel quite sorry for all the employees.

I could do without the stress of AIG going under tomorrow as well.

Anonymous said...

It cracks me up that the government bailed out Bear and then decided to make Lehman a sacrificial lamb. The point of the sacrificial lamb, I presume, is to pretend/send a message that Bear, Fannie, and Freddie did not set a precedent for bailouts (even though they did).

The problem is that, even after letting Lehman go BK, it will still be politically difficult to stop bailing corporations out. It will be especially difficult when the highly political auto/airline companies come to the government with cup in hand.

PS: How about those stealth bailouts? The regulatory bodies have all but suspended regulations (which makes a regulatory body useless). I especially like how the Fed has, once again, broadened the range of collateral it will take. I wonder how long it will take the Fed before it literally accepts a steaming pile of crap as collateral.

CityUnslicker said...

Matt - agree soundly. One thing, have you seen how much the US government bails out the airlines, billions a year doubt they will want more.

AntiCitizenOne said...

Watch out for interest rate moves tomorrow.

Wrinkled Weasel said...

I love to read this blog. I don't understand economics and finance, but then I don't understand cricket either and I still enjoy the radio commentary.

Mark Wadsworth said...

CU, your final point on hedge funds does not compute. If you short a stock, you are not 'stuck with' it; somebody else is, because you've sold it. And you can buy it back for presumably £nil.

BE, Seeing as banks can have a negative value, there is not necessarily always a good price to buy a whole bank, what you want to do is asset strip the good bits.

Anonymous said...

I think you are missing the point. It seems Lehman's had approaches from other banks but turned them down. It also was working hard to repatriate its assets to the US. Why? My guess is the Federal Reserve and Treasury officials had already taken a good long hard look at Lehman's books behind the scenes and decided it was bust months ago, along with Merril Lynch and Bearn Stearns. So they decided months ago what should happen. If Bear Stearns and Merril had gone bust their books would be open to the public and everyone could take a gander at exactly why they had gone bust - not necessarily good news for a US Government that is $10trillion in debt itself. My guess is that Merril and Bear Stearns had to be steered into safe harbour to stop that happening. Notice that whilst people are asking the questions "How come the Fed is doing this kind of thing, isn't it exceeding its authority?" and "Don't the shareholders have a say in what happens to their company?" and "Why wasn't an Extraordinary share-holders meeting called to discuss the situation?" the fact is there are no answers forthcoming. The US authorities are simply sticking two fingers up at everyone and saying "We don't want you to find out what was really going on at Bear Stearns and Merril Lynch, so go to hell". They obviously don't care so much about Lehman's but they have made sure that US investors are less likely to get burned by pushing Lehman's to transfer their assets back tot he US to make sure that US creditors can get their hands on them once Lehman's went bust.

Basically the US intends to default on its $10trilion of debt but to do it by the back door in the hope that no-one notices. They have been doing this for decades which is why left-wingers in Europe hate them to hell and back. The RoW is always being shafted by the US but because they are always first to pick themselves back up off the floor we will be queuing up to do business with them again in a few years time.

Letters From A Tory said...

So much for UK banking being 'immune' to the US problems.

Elby the Beserk said...

AIG are of course Man United's sponsors. The same ManYoo who are paying 14% interest on the Glazers junked up purchase of them. As a lifelong City fan, I have this nightmare that United will go bust, and Brown will nationalise them and call them The Peoples Football Club.

Were he to do that, I would have to hunt him down like a dawg.

Mind you, it is hilarious to find out at the last gasp that Bus is in fact an International Socialist. Imagine my surprise!

CityUnslicker said...

Mark, not when they have to close their positions for shares that don't exist. that is how it works.

Ryan - your point about the transfer of wealth back the the US is quite correct. Lehmans would not even send over the funds to pay staff in Europe on Sunday for their last month, let alone redundancy. nice.

Anti - post on interest rates to come.

Elby the Beserk said...

Bus = Bush!

Mark Wadsworth said...

CU, in other words, if they have shorted stock, they have to buy back shares that don't exist? Can't they just reimburse the original sotck lender the value of the shares, which is ... er ... nil?

CityUnslicker said...

mark, they have a contract to buy at a specific price from the lender - i.e. the lenders guard against this eventuality, leaving the risk with the shorters.

Mark Wadsworth said...

CU, the situation to which you refer is (please confirm) as follows:

You (CU) own stock in LB and are the 'stock lender'.

I (wicked hedge fund) intend to short the stock and agree with you that as of next week, I will 'borrow' the stock for today's current market price.

A couple of days later, the stock becomes worthless.

Your logic is that you then fob off your stock on me for the price as at last week (as agreed), so I have to pay you what it was worth a few days ago and am stuck with stock I can no longer short.
Still does not compute.
Surely, if I was gambling on the stock going down, I will have sold it forward last week to an even bigger mug for last week's price? So he gives me 100% of last week's value, worst case, I have to pay you 100% of last week's value as well, so I break even.

And if I am sophisticated enough to guess which stocks are going down, no way would I enter into a forward contract with you to buy in a week's time for last week's price; I'd just do a contract-for-difference.

Mark Wadsworth said...

... and doesn't a stock-lending agreement assume that I buy from you and sell it back to you at the same price (adjusted for dividends paid out in the interim)? So the stock borrower can never end up owing the stock lender money?

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